G Chandrashekhar

Gold, silver prices decline on profit-taking; base metals suffer heavily

G. Chandrashekhar Washington DC | Updated on September 11, 2011

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That commodity markets are sensitive to the global macroeconomic picture is well known. The weakening macroeconomic situation and concomitant negative sentiment continue to dictate the trajectory of the world commodities market. Last week was no different. Markets were under pressure.

Metals were the worst hit. Both base and precious metals were down week-on-week in London. While the impact on base metals complex was not unexpected, precious metals, especially gold and silver, failed to benefit from the ongoing condition. The differential between Brent and WTI widened to a new record of over $26 a barrel with many asserting that WTI market is overdone to the downside.

In its interim economic assessment, OECD confirmed that economic growth across the world has decidedly slowed with recovery in major industrialised economies coming close to a halt while the hitherto strong growth in emerging countries was beginning to moderate.

The debate over the US fiscal policy, the sovereign debt crisis in some European countries and the fact that governments have fewer options to boost growth are driving business and consumer confidence downward, the report pointed out. Whether President Obama's $ 447 billion proposals for jobs creation will boost the sentiment and, in turn, the US dollar remains to be seen; but conditions in Europe are reported to be closer to tipping point. China provides a silver-lining. The latest round of Chinese macroeconomic data showed a favourable combination of steady growth in key sectors and weaker inflation. There is now expectation that the monetary policy will be somewhat eased in the next few months.

So, overall, there is continued uncertainty surrounding the state of the global economy. Markets are waiting for decisive direction. Sustained flow of positive macro data is necessary. In the event, fundamentals will assert themselves and commodities with tighter demand-supply balance – crude and copper, for instance — deserve to be watched closely.

Gold: The precious metals complex was down last week with gold losing 1.3 per cent and silver 2.6 per cent week-on-week. Both gold and silver suffered on profit-taking, with the former witnessing rising intra-day volatility. CFTC data for the week ended September 6 showed tactical investors increased their exposure to Comex gold for the first time in four weeks. Net fund length rose. Non-commercial positions as a percentage of open interest remained at 35 per cent.

On Friday, in London, gold PM Fix was at $1,851 an ounce, down marginally from the previous day's $1,855/oz. Silver suffered the same fate with Friday AM Fix at $41.40/oz, down 1.8 per cent from the previous day's $42.14/oz.

Notwithstanding what happened last week, the overall macro environment is still favourable for gold. Continued economic uncertainty and many central banks keeping interest rates unchanged are expected to support the yellow metal. Price dips have encouraged physical demand from Asia. Silver, of course, continues to draw support from gold's trajectory; but its weak fundamentals mean greater vulnerability.

While there will surely be short-term corrections, overall there is reason to remain positive on gold. How the dollar behaves after the President Obama jobs creation plan needs to be watched.

Technical analysts are bullish on gold and advise opportunities to buy on dips toward 1,750 against the 1,700 low. The upside targets are at 1,930 and then 1,970. The medium-term outlook is bullish with support at 1,790/1,750 and resistance at 1,900/1,921.

Base metals: There was huge sell-off in the complex last week with European sovereign debt issue again taking centre stage. On the LME, the entire complex declined over the week, with copper and aluminium both falling 2.8 per cent. Copper LME cash was $ 8,800 a tonne on Friday.

As macroeconomic concerns continue to hold sway, further short-term corrections in base metals cannot be ruled out. What the trajectory will be from here on is unclear, as sustained flow of macro data alone can help improve the sentiment. At current levels, copper is seen as good buy. Lead demand from Chinese battery manufacturing plants has the potential to recover.

Crude: The market's focus continues to be on weakening demand with the macroeconomic picture far from supportive. The widening price differential of over $26 a barrel between WTI and brent is seen unsustainable. There is growing feeling that WTI price may have overshot to the downside largely on unjustified concerns over the US inventory levels, while brent is dictated largely by market fundamentals. An improvement in macro sentiment has the potential to change the price trajectory.

Published on September 11, 2011

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